Musings on Economics, Finance, and Life

Key Readings on America’s Fiscal Plight

It remains to be seen whether our elected leaders have much enthusiasm for dealing with America’s troubling fiscal trajectory. But the policy commentariat has embraced the issue with relish.

If you have a few hours (or days) to ponder these issues, let me recommend the following:

Train Wreck: A Conference on America’s Looming Fiscal Crisis, held last Friday at the USC Law School. Conference papers addressed a host of issues, including the need to pay attention to tax expenditures, the burden of state pensions, the potential for catastrophic budget failure, and the arithmetic impossibility of solving our budget woes by raising income taxes on the highest earners. I had an unusual role in the conference, presenting a paper by Joyce Manchester and Jonathan Schwabish of the Congressional Budget Office about the role of health spending in our long-term budget challenges. I didn’t play any role in preparing the paper, but was happy to present the findings when neither of the authors could attend. My presentation is near the end of the afternoon session (video here). Bottom line? Our fiscal trajectory is unsustainable thanks to population aging and rising health spending.

Choosing the Nation’s Fiscal Future, released last week by the National Research Council and the National Academy of Public Administration. Weighing in at a hefty 360 pages (including appendices), this report provides a comprehensive overview of our budget challenges. More important, it then lays out strategies for addressing them. And it makes very clear the most important decisions we face: how big a government do we want and how should it balance the interests of older and younger generations?

Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt, released last month by the Pew-Peterson Commission on Budget Reform. This report reviews our fiscal prospects and makes six big picture recommendations: (1) Commit immediately to stabilize the debt at 60 percent of GDP by 2018; (2) Develop a specific and credible debt stabilization package in 2010; (3) Begin to phase in policy changes in 2012; (4) Review progress annually and implement an enforcement regime to stay on track; (5) Stabilize the debt by 2018; and (6) Continue to reduce the debt as a share of the economy over the longer term. This framework strikes me as reasonable, although one can always debate the exact numbers (e.g., would 60% in 2018 be that much better than 60% in 2020?).

The Right Target: Stabilize the Federal Debt, released last week by the Center on Budget and Policy Priorities. Another excellent overview of the budget challenge, this report agrees with the Pew-Peterson report in many qualitative ways, but disagrees on tempo: “Pew-Peterson Commission endorses sounds ideas but overly ambitious target.” The authors would like to see deficits reduced to 3% of GDP or lower by 2019. (A goal that OMB Director Peter Orszag has also mentioned.)

A Path to Balance: A Strategy for Realigning the Federal Budget, released last month by the Center for American Progress. This report takes a slightly different approach from the others, focusing on achieving primary budget balance (i.e., balancing revenues with spending excluding interest payments) rather than a debt-to-GDP target. Those concepts are closely related in analytic terms (each of the reports explains why), but as Stan Collender over at Capital Gains and Games notes, the concept of achieving primary budget balance may be a better talking point than stabilizing the debt-to-GDP ratio. Because CAP has close ties to the Obama Administration, Stan also suggests that its budget thoughts may offer a “sneak peek” about what to expect in the President’s upcoming budget.

I’ll wait on recommending it until I finish it, but I certainly respect Walker for all he’s done to raise awareness of the issue, and I’ve found him very sensible and responsible, as well as a good communicator.